Cautious investors keep eye on stocks
WHEN something is as good as it gets, what comes next?
In the US, companies are in the midst of reporting another quarter of profit growth, driven by lower tax bills and a growing economy.
Yet stocks are not getting the boost they usually do when companies report betterthan-expected earnings.
The S&P 500 is down about 4 per cent since the start of October, despite the index being on track to deliver 25 per cent growth in earnings per share for the third quarter.
The reaction can be tied to the concern among investors that this may be the peak for corporate profit growth.
Analysts say growth may slow to 15 per cent in the last three months of the year.
Next year, profit growth is likely to fall sharply because companies will no longer be getting the big boost provided by a sharp drop in their income-tax rates.
That is, unless Washington approves yet another tax cut.
Earnings growth may run about 9 per cent next year for S&P 500 companies. The growth expectations are key because stock prices tend to track corporate profits. When profits are surging, it gives investors more reason to pay high prices for stocks.
Investors say stocks look either fairly valued or still a bit expensive. The S&P 500 is trading at 16.1 times its expected earnings per share. That’s a more expensive priceto-earnings ratio than its average of 14.7 over the past 15 years.
For stocks to look more attractive, either prices need to drop or earnings need to rise. It is why investors are putting emphasis on what comes next.